What is a loan modification program?

By Stephanie Harris

Loan modification program is an option that is provided by the bank to the home loan borrowers who are not able to pay off their mortgages due to a financial hardship. A Loan modification program consists of modification of any or all of following terms and condition of loans:

  • Resetting the interest rate,
  • Payment deferment for a particular period of time
  • Readjustment of principal amount;

The terms of loan modification may vary from bank to bank.

Most of the banks proactively approach borrowers who have been delinquent for more than three months; the borrowers can also approach the bank in anticipation of financial hardship that can lead to default in mortgage payments.

The broad eligibility criterions for entering into home loan modification program are as follows:

  • The loan should be held and serviced by the bank from which the home loan modification is sought.
  • The debt to income ratio of the borrower should be more than 31%:  This is to make sure that income of the borrower is enough to spare for the modified mortgage payment after taking care of the all the monthly expenses.
  • The loan modification is allowed only for the first mortgages of the borrower.
  • The property on which loan modification is sought by the borrower should be the primary residence of the borrower. This is to discourage the owners seeking home loan modification on properties for investment purpose.
  • The interest rate reduction will not be less than 2%.

Loan modification is a federally backed program and all the major lending institutions and banks such as Federal Housing Finance Agency (FHFA) including Fannie Mae or Freddie Mac, Citigroup, Bank of America, JP Morgan Chase

The process of entering into home loan modification program is as follows:

  1. The borrower has to furnish proof of income via pay stubs, tax returns and verification letter from the employers.
  2. The bank then calculates the modified mortgage payments at around 31% of debt to income ratio. The modified mortgage payment includes taxes, insurance and all the fees barring late payment fees. If the mortgage payments are more than 31% of the income, the lender will lower the interest rate by 0.125% till the mortgage payment amount reaches higher side of 31%. If the mortgage payments still come out to be more than 31% then a lump sum principal  amount is due payment at the end of the  payment period.

Home loan modification is a very easy and can save your home from undue foreclosures.

One good option for newbie is to seek assistance from specialized service providers for successfully getting home loan modification. The expert personnel of these companies can help you from properly filling up the documentation to successfully negotiating with the bank for a home loan modification.